Shopping for a Credit Card

What's the best credit card deal? Is a lower rate
worth the annual fee? Which is better - flight miles, rebate points, or
low rate? Consider all of these features when selecting the best
credit card for you.

Shopping for a credit card can seem like looking for
a needle in a haystack, but following some simple steps can get you
to your goal.

Types of Cards

First, you must decide what type of credit card you
want and need. There are basically two types of credit cards:

Unsecured cards are
those that are not secured with cash. They are based on your past
credit history.

Secured cards are those that are secured with a
certain amount of cash. Your credit limit is usually equal to the
amount of cash with which you have secured the card. The benefit
here is building your credit history with small purchases each month
and total payoff at the end of each month.

Additional Credit Card Features

Depending on who the issuer is, there are many
different features available on credit cards:

Rebate cards offer
monetary rebates based on the amount of purchases you make on the
card. These rebates can range from one to about three percent of
total purchases, based on the card. Rebates are usually processed
annually, and generally appear as a positive amount on your
statement. The likelihood of getting a whopper of a check in the
mail is pretty low, unless you plan to make many purchases and your
credit limit is quite high.

Point cards offer
points that can be redeemed for merchandise or airline tickets.
Again, the amount of points you receive is based on the amount of
purchases you make on the card. The point statements usually are
processed quarterly, and can be redeemed whenever you reach an
amount needed for a particular redemption item. However, these
points usually don't hang around forever. They are sometimes voided
at the end of a certain time period.

Affinity cards
associate cardholders with certain institutions, companies or
service groups. These cards offer incentives for use in the form of
discounts, special services, and donations.

Co-branded cards are a type of affinity card
where a partnership exists between a card issuer and another
company. Both brands are on the card. These cards are most commonly
offered with airlines where frequent flier miles are awarded for
amounts of purchases on the card.

Evaluating the Cost of Using Credit

There are many variables to consider when evaluating
the cost of credit. You must also compare the cost to the additional
features that may be a part of the credit card offering.

Finance Charges

Interest Rate: Credit
card companies look at your past credit history to determine the
rate they are willing to offer. If you want to carry a balance on
your card, you will probably look for the lowest rate. If you plan
to pay off your balance each month, the interest rate is not as much
of a concern. Often point or rebate cards have higher interest rates
in exchange for the benefits.

Introductory Rates:
Some credit card companies offer introductory rates, which are also
called initial or teaser rates. These rates are set for a certain
amount of time and then rise to another specified amount at the end
of the introductory period. Introductory rates are often offered as
incentives to transfer balances from other cards. Be sure you know
the rate you will be paying after the introductory period is over,
as it may be quite different from the lower rate.

Calculation of
Interest: Card companies compute finance charges differently and
offer different grace periods for purchases. Make sure you
understand these important variations as you evaluate your credit
card options:

Adjusted Balance
Method: Some companies compute finance charges based on an adjusted
balance. This method is usually the most advantageous method to
cardholders and subtracts all payments made within a month from the
balance at the end of the previous month. New purchases are not
included when finance charges are calculated.

Average Daily Balance
Method: Most companies use the average daily balance to figure
finance charges. The daily balance is calculated by deducting any
payments or credits from the day's beginning balance. Your daily
balance is added each day and then divided by the number of days in
the billing cycle to arrive at the average daily balance. This
figure is multiplied by your monthly periodic interest rate to
determine your monthly finance charges.

Make sure you know what method your credit card
issuers are using to calculate finance charges. It makes a difference
in the total annual percentage rate you will pay. For an
explanation of credit card terms, reference the
Financial Glossary..

Other Considerations

When shopping for the best credit card for your
situation, you also need to consider how long the grace period is and
when the billing cycle runs.

The easiest way to shop for a credit card to meet
your needs is through the Internet. There are many web sites that
allow you to enter specific criteria and then match you with
potential credit card offers. You
can try Bankrate.com or
IndexCreditCards.com for
comparison tables of credit cards. You can also have a look at the U.S.
Federal Reserve Board's credit card
survey, done twice a year.
You may also respond to offers you receive in the mail. Some
companies do initial screening processes and then mail to those who
fit certain criteria. These offers are not guaranteed and require
approval. Just make sure you select a card with terms you can live
with. The terms are specified in the cardholder agreement and you
should read this document carefully before using your card. Card
companies can differ greatly in how they handle your credit. For more
information, read our related
articles about credit cards in the Knowledge Center Library.

When you’re working to avoid building or adding to credit card debt, the smart choice has been to use cash or a debit card instead. A growing number of financial institutions, however, are starting to charge fees when you use your debit card to make a purchase, making it a bit more challenging to live a “cash only” lifestyle.

If you believe the credit card commercials, you're not going to be able to have any fun in life unless you use their card. Well, if you've ever carried a balance on your credit cards, you know that paying interest is no fun at all. Tack on a late fee or over-the-limit fee and the good times are really over. Although credit cards can provide immediate gratification, they're more likely to cause long-term stress in your life. Thankfully, there are alternative strategies for living life without credit cards.